Week 8

What is Money?
Evolution of Payment System and Measuring Money
Evolution of the Payment System

 The payment system for goods and services utilizing by the humanity in todays
World is evolved over time slowly. In the following this evolution of payment
systems is discussed
 Commodity Money
 The most important characteristics for any commodity to be used as money is its
universal acceptability
 This characteristics is found in precious metal, hence, initially precious metals e.g.
gold, silver etc. are used by the humanity as money
 This type of money is very heavy and hard to transport
 Paper Currency
 With the passage of time on account of advancement in technologies, paper is used
as money
Evolution of the Payment System

 The paper currency initially utilized as money is backed by the precious metals. It
means that the government is bound down to pay precious metal on demand.
 Fiat Money:
 After some times the paper currency utilized for money was not backed by the
precious metals. But it is backed or decreed only by the government legal tender
(guarantee). Such type of paper money is called fiat money
 Problem with paper money is that they could be easily stolen and expensive to
transport
 Checks
 With evolvement of banking system, the checks are also used as money
 A check is an instrument from you to your bank to transfer money from your account
to check holder
Evolution of the Payment System

 The advantage of a check is that there is no need to transport huge amounts of paper
money and less probability of theft
 This system enhances the efficiency of payment system because payments and
cancellation of payments are feasible even without transporting paper currency
 Two problems are involved when payments are made by checks:
1. Delayed payments in case that check is issued at a different location than the location
of bank over which the check is withdrawn
2. Paper shuffling required to process checks is costly
 Electronic Payment:
 Recent technological advancement and fast flow of information technology makes the
payment system even more flexible

Evolution of the Payment System

 Banks’ websites and mobile applications now made the payments system easy for
billing, transferring of funds, online purchasing etc.
 All this system is known as electronic payment system
 E-Money
 All types of payment cards (Debit Card, Credit Card, Smart Card) are included in E-
Money or Plastic Money
 Debit card helps to handle your bank deposits for payments with the help of ATMs
and POS terminals
 Credit cards could also be used for this purpose. Basic difference is that debit card
has no credit limit whereas credit card has the credit limit for card holder
 Smart Cards could also be used as debit card. This card needs no deposits in the
bank and has an extra facility of reloading the card at bank desks
Measuring Money